Should I combine 401K's into one IRA?

sandyinvaJune 29, 2011

I just rolled over my 401K into an IRA as my former place of business closed. My late husband has 2 401K's: My financial advisor suggested that it is better to combine them all together into the IRA. I have worked out a plan it will convert to an annuity in several years when I am really sick and tired of working.

One of the 401K's is with Computer Sciences Corporation and has some company stock.... Am I better to keep that one separate?

One account at a brokerage like Schwab can hold a great number of investments: individual stocks, bonds, mutual funds.

And I hope you do some very serious research into converting a tax-sheltered account like an IRA/401K into an annuity. That is generally NOT recommended except by people who get large commissions selling annuities.

I did not provide enough detail: the majority of the IRA account will continue as such for at least 5 years, I am currently 62, After 3-4 years, when I decide I am ready, designated portion will become an annuity with no charge. I have other assets besides the 401K's, just am doing them first. So AM I better off combining all three of them or should I leave the one with stock in it on its own?

There's really no reason to keep all the investments separate. If you've got a single, self-directed IRA, you can invest in anything and everything, so you can split it up in lots of different diversified investments, including CSC stock if you want. And it's probably a little simpler to have a single account in one place.

Of course your investment advisor thinks that it's better to combine them. He/she will then have more assets to tap into for commissions. :-)

1) It is just easier to manage 1 thing than 3.
2) You'll have more options in an IRA vs a company driven 401k.

The downside would only be with whatever fees you are paying your financial adviser. If she is flat-fee or hourly, then fees won't increase. If she is charging a some percentage, that could be substantial.

I also agree that you should re-look at the annuity option and do a bit more research. Not all annuities are bad, but using IRA money to fund one really undercuts the tax advantages.

You shouldn't hold annuities in an IRA. If your advisor is recommending that, you should change advisors. I'm serious about this - I worked for a great independent CFP, and we had a couple of new clients come in where this had been done in their previous accounts. I was told there was no tax advantage at all in doing this, and because of the long holding period before the policy could be cashed in, the clients were stuck with a mediocre choice of funds. All we could do was make a note that on xx date, some five years in the future, we would start the paperwork for a 1031 exchange so they could get a better policy.

If your advisor is a fiduciary and gave you this advice, get full details on WHY s/he recommended it, and talk to a second fiduciary to get a second opinion.

And yes, you should combine all previous 401k's into one IRA. I've done the paperwork for doing that for someone who was deceased, and it's a real mess. Make it easier on yourself and your heirs, and consolidate.

For your CSC 401k, it's up to you whether you want to keep it separate to hold the stocks. I personally wouldn't, but that's just me - I prefer funds to individual stocks. There is no profit in sentiment when it comes to investing; in fact, emotion is the biggest obstacle to overcome when aiming for a good ROI.

Get a good, low-fee brokerage, like Vanguard or T. Rowe Price, and do a balanced allocation for the combined portfolio. I prefer the first two to Fidelity, but YMMV. Good luck to you!

Thanks so much, Jkom, I will talk with him again next week to inquire about the terms of the annuity. I think he said that a certain percentage of it would become an annuity, and would no longer be part of the IRA. I will be sure to get the specifics. The first time we spoke, I took copius notes, it seemed to make sense at the time, later it all seemed like a math class from high school and I wished my husband was still alive, as he had so much experience with this, and would have known exactly what needed to be done. ALl we really did yesterday was to roll my 401k over, and lightly talk about about long term care insurance, ( still gathering info on that.)

I think that one of the main points made by several people (people with excellent credentials, people you should listen to) is that you need to talk to someone else. The person you are dealing with will make a skunk smell like a rose no matter how many notes you take, he's dancing around a LOT of issues. He might be ok, but he's already giving you very poor advice regarding annuities and tax-sheltered accounts.

It may be me that has misunderstood things, my husband died unexpectantly in March, 3 weeks after being diagnosed with cancer, and I have many things on my plate. It's difficult remembering every aspect to this when the terms are new, let alone trying to make sense of the loss of my husband, and knowing that the rest of my life is forever different from what we planned.

The advisor works for a reputable and well rated corporation, he is salaried, and does not work on commission. It's more likely that I have not related all pertinent details b/c I may not have known they were pertinent at the time.

The things I have shared with friends from this experience: should your spouse die, and you have joint accoints, do NOT be in a hurry to notify the financial institutions, because everything freezes, including joint credit cards. All automatic payments to utilities, credit cards, mortgage, stop. Once they have turned everything over to you, it is nearly impossible to cash checks in his name unless you present the will.

>>The advisor works for a reputable and well rated corporation, he is salaried, and does not work on commission. It's more likely that I have not related all pertinent details b/c I may not have known they were pertinent at the time. >>

Unfortunately, being salaried doesn't make him a reliable and trustworthy advisor. It doesn't ensure that he's a fiduciary, which you don't mention. If he is not, then his advice is based on the suitability standard, which means the interests of HIS COMPANY and HIMSELF come first, not yours.

So many people use an advisor because "they're so friendly" and "my neighbor/uncle/co-worker uses him, and they're happy with his services".

It doesn't mean this is the best advisor for you. Did your advisor explain how this annuity conversion works? Can they help you estimate your tax liability - because you will owe taxes, withdrawing from a retirement account to purchase an annuity. Is it immediate, deferred, variable or fixed? What's the surrender period? How much are the fees, both initial and yearly? What percentage of your portfolio allocation will be tied up in this annuity? With interest rates eventually rising, is it better to hold off or ladder a series of annuities? How will the rest of the portfolio be invested to offset the portion in annuities?

Most importantly, you do not need to be in a hurry to do ANYTHING. Educate yourself first, learn to ask the hard questions when interviewing an advisor - there's tons of info on the web: FINRA.org, NAPFA.org, Garrett Planning (garrettplanningnetwork.com), MSN Money (money.msn.com).

SmartMoney magazine has one of the better articles on finding an advisor, so I've linked it below for you. Frankly, you should be spending some money wisely by finding an independent fiduciary advisor to look at your overall financial planning situation, which includes determining your goals, defining your risk profile, looking at your insurance needs, estate and tax planning, getting your legal documents in order, and THEN planning your investment allocations.

What you invest in, is not as important as why you are investing in something, how much it is costing you, and making sure that investment fits within a cohesive financial planning framework which suits YOUR situation, not the situation of your neighbor, your uncle, or us anonymous Web posters.

The term "financial planning" is a legal one, and it seems as if you might benefit from developing a relationship with someone who can help you learn the smart way to plan your financial future, instead of relying on a lot of conflicting advice and then taking the easy way out. Money takes hard work to earn it, but if you're not careful it can disappear very quickly.

When I was working my last job in the FinSvcs industry, I heard some heartwrenching stories of people who had lost most or all of their entire life savings (and this was well before the 2008 crash). Unfortunately, fully 50% of the time it was all their own fault, legally speaking. They got sweet-talked into investments, trades, and other instruments (yes, like annuities) that were way out of their risk profile, by brokers whose sophisticated patter is honed by high-priced corporate lawyers and aggressive marketing departments.

The consumer protections you are accustomed to in regards to your credit cards, your checking and savings and CD accounts, DO NOT EXIST when it comes to financial investing. In this segment of the financial services industry, it is strictly 'caveat emptor'. Ignorance is legally your own fault, not the fault of the broker, the brokerage, the insurer, or the financial institution.

So being 'salaried' and working for a Big Corp. is more of a disadvantage than an advantage. Like using a lawyer or a doctor, you are better off educating yourself, and paying for someone to be on your side who has a legal responsibility to put your interests first, than to save a few hundred dollars and some time, but end up worse off.

What about not doing anything at all with these accounts for, say, 6 months, while you study up on the subject? If you get a lot of pressure to act immediately from your adviser, that's another very bad sign.

Just step back, and give yourself time. It'll be the best thing you can possibly do right now. The worst thing is to leap into anything without sufficient research.

A great rule of thumb for dealing with finances after a loss is "Don't do anything major for a year." Park the money someplace safe (almost all 401k's have some sort of cash-like option.) This will also give you a bit of time to research some of your options. I would suggest you make a list of pro's and con's for things like annuities, mutual funds, bonds etc instead of trying to determine which is "best".

Besides, interest rates are incredibly low right now, so there really isn't much/any advantage trying to lock in anything now vs waiting until closer to the time when you will need it.

I have worked out a plan it will convert to an annuity in several years when I am really sick and tired of working.
I would be very careful about acquiring an annuity. I've really not seen what the pros are, as opposed to the cons.

Taken from the CNN Money site linked below:
What happens to my annuity after I die?
It depends on the type of annuity and how your payouts are calculated. There are several different methods.

You do have the option of naming a beneficiary on your annuity, and with certain types of payout options that beneficially could receive the money in your annuity when you die. Other options just pay out during your lifetime, and the payments stop when you die.

you might want to also read through all the annuity basics at the link below...some very good food for thought.

I am currently 62, After 3-4 years, when I decide I am ready, designated portion will become an annuity with no charge.
Oh but there are fees...please read what the disadvantages are at the link below.

Yes, there are always fees on an annuity policy. They are profitable products for insurers. This doesn't make them automatically bad, but you have to be very careful that the policy is tailored to your own special needs, not just to give the maximum profit to the insurer and agent.

Because there are many kinds of annuities and the tax rules are very important, I would never personally buy an annuity without receiving all the details, having at least three competing bids from different carriers, and then running them by a fiduciary advisor. Annuities are one of the very few products that can be difficult/expensive to get out of, if you've made a mistake.

In the right situation and financial plan, they have a place. But they're a sophisticated and complex purchase, and not something easily analyzed by most amateurs - and yes, despite 12 yrs in insurance and 2 yrs in financial services, I'd still count myself an amateur in anything but life and LTC insurance.

Thanks, guys, I will do all suggested reading, SO far all I did was mandatory; that was to roll my 401K into an IRA b/c my former company went out of business in April. I will read over everything that was suggested, and then I will address those issues with him as well as others, for comparison's sake. I do have other assets that I am just letting sit for the time being until I know how my monthly ebb and flow of cash works with the survivor benefits pension, and my salary for the time being. I did remortgage my house, and should be able to nearly pay that off in 10 years, for what I was paying for the next 20 years.

I can let the other two 40lK's sit for the time being. The firm dealing with my 401K is USAA. We have dealt with them for 30 years, although their financial advising is fairly recent. Not that I profess to know what I am talking about, as I have a lot of self educating to do, but we had planned to talk to them this summer anyways before everything fell apart, so I was following through with my husbands plans.

What I should have done sooner was long term care, like in my 50's.

Many thanks, we used to have a subscription to Smart Money years back. Guess I should have kept it going.

USAA has a good rep so I don't think it should be a problem for you to leave it there for a while. SmartMoney's website I believe is free for access, but I could be wrong - I'm a WSJournal subscriber and the two are owned by the same company so there's a lot of cross-links on the websites.

It isn't easy finding an good independent fiduciary advisor, but for people who need help developing a comprehensive financial plan (which is not the same as earning a high ROI on investments), I think it's essential. Most middle-class folks would find it helpful to talk to a neutral third party who can ask the hard questions and analyze your total financial picture.

One thing for everyone to be aware of is that when I refer to financial planning, this is not only a legal term, it actually refers to creating a 'road map' that takes you from your current financial situation to achieving your short, medium, and long-term goals. It is aiming for a moving target, so any life-changing events - life, death, marriage, divorce, change of job - means some fine-tuning may be needed to your plan.

To produce a good plan requires time spent in not only gathering all your financial info and analyzing it, but defining your goals. Some will be achievable and some will not be. Only you can define and prioritize them, and a good advisor will help if needed.

You can get a financial plan, separate from investing advice, from any certified fiduciary advisor. Cheaper ones are computer 'plug in the numbers' produced, so always make sure you understand the base assumptions, and have multiple scenarios run to be sure you're covered for any contingencies/emergencies you haven't foreseen.

Establish the total cost of meeting, gathering info, analyzing, and producing the plan(s) up front before signing anything. It takes time to do a financial plan, and anyone promising you it will be easy and fast isn't going to do a comprehensive job. It's an advantage for the fiduciary to be an insurance agent OR to be very familiar with insurance analysis, because many people could use advice on how to use different types of insurance to mitigate risk in various areas of their life.

At a minimum you should contact at least three fiduciary advisors, obtain references, and investigate them thoroughly, before working with one. Even if all you need is a financial plan, do the research, but confine the requested references to clients who received a financial plan at least three years ago and are willing to discuss its usefulness.

It is not uncommon for people to pay for a financial plan and then follow the suggested actions on their own; e.g., do their own investing, etc., without engaging the advisor to handle their portfolio. OTOH, a financial plan that goes unimplemented is just a useless piece of paper. We used to have to gently 'nag' our clients that they still hadn't completed certain checklist items on their plan, so it depends on how good you are at doing tasks that many people put off....until it's too late.

Contrary to almost everything you read on here bashing annuities in general, you or anyone can fund a fixed annuity -- one that pays you a sum certain each month for the rest of your life -- with money from an IRS or a 401K without any lose of tax benefits. You pay taxes on your monthly benefit, of course, as you would on any distributions you take from tax-sheltered retirement accounts, such as traditional IRAs and 401Ks.

You can also set up what is call a deferred fixed annuity, which means that the monthly payments to you don't start immediately, but a certain number of years down the road. This may be the kind of annuity your advisor is talking about. If it is, then you should ask him why taking it out now would be better than just waiting to fund it when you do retire, which is what I would do in your situation.

Why? Beacause fixed annuity rates are extremely low now due to the very low interest rate climate we're currently in. That means for the lump sum you put in, you don't get as high a monthly paymenht as you would if rates were higher. Since it's likely, IMHO, that interest rates will be higher in three years when your planning to retire, it makes sense that you should wait and do it then.

Many financial and retirement experts recommend putting up to 30% of your retirement portfolio into an immediate fixed annuity, especially if your monthly income from SS, pensions and income from investments will fall short of what you need each month. But if you believe you'll have plenty of money to live on during retirement, then fixed annuities might not be the thing for you.

Again, ask your advisor for a detailed explaination on what kind of annuity he's talking about, why he thinks you need one, and, if you're convinced you do, why it wouldn't be better to purchase a fixed (and this is the only kind you should consider) annuity when you actually retire.

Oh and by the the way, fixed annuities are actually a very low-risk place to park some of your retirement money because every state has extablished a pooled fund (sort of like FDIC) which reimburses fixed annuity holders up a ceiling amount --which varies from state to state -- should the insurance company that set up the annuity fail.

>>Contrary to almost everything you read on here bashing annuities in general, you or anyone can fund a fixed annuity -- one that pays you a sum certain each month for the rest of your life -- with money from an IRS or a 401K without any lose of tax benefits. >>

Sorry, should have been more specific in one of my posting replies.

There is a difference between FUNDING an annuity with proceeds from an IRA and HOLDING an annuity within an IRA. My comment about the inadvisability of an annuity is specifically about annuities held within an IRA.

Nonetheless, even if held outside an IRA, you need to investigate the fees and restrictions. They are always there, the insurers do not process this investment for free any more than a brokerage or bank would.

Using annuities for investment purposes is again, very possible but not something the average person should do without some research.

Most state insurance reimbursement limits are $100K/type of policy, but some are as low as $50K.

No, none are as low as $50K. Most are $100K, but some are substantially higher -- see link. Besides, you can always work around that problem by taking out annuities with more than one company.

Fixed annuities ARE NOT an investment and shouldn't be regarded as such. They are a way of guaranteeing yourself a fixed monthly income for life. Generally, the monthly benefit you receive is more than you would get by investing the same sum of money in equity investments, assuming your investments during retirement are on the conservative side, as is generally recommended and you're withdrawing from them at a 4-5% rate, which is also usually recommended.

The insurance company makes money on fixed annuities not by charging you fees, but by investing the lump sum you give them up front. They are betting that you won't live too long. They make a healthy profit if the total amount of payouts they make to you while you're alive is less than the money they have realized (lump sum plus their investment returns) from the deal during your lifetime. If you die early, they win big. If you die late, they lose. If you die right on schedule, they still make enough money to make the deal worthwhle.

OTOH, variable annuities ARE investments and, IMHO, you could do better investing your money in other ways. They carry much higher fees than is typical of most other investment vehicles and that drags down your returns.

>>The insurance company makes money on fixed annuities not by charging you fees, but by investing the lump sum you give them up front. >>

Feedingfrenzy, I'm very interested in your statement. I have never seen an annuity policy without an annual management fee straight off the top of the guaranteed ROI. Could you give an actual example of a specific insurer that does not charge fees on annuity policies? Thanks!